Chinese banks to be more cautious in issuing wealth management products in 2017

Banks have already issued RMB 26.4t as of 2Q16.

According to Natixis Research, the tough times that Chinese banks are facing, especially in terms of asset quality, is not yet being fully reflected in their profitability. Full interest rate liberalization and increasingly low interest rates have pushed down Chinese banks’ net interest margin quite aggressively.

However, banks’ fee income has continued to grow on the back of their increased participation in the shadow banking, particularly, through the issuance of wealth management products (WMPs).

Here's more from Natixis Research:

As of the second quarter of 2016, banks have already issued RMB 26.4 trillion, contributing to 28% of total issuance. If such off-balance sheet assets were to be moved on-balance sheet, the leverage of Chinese banks (measured as asset-to-equity ratio) would increase by 15%.

Whether the trend will continue in 2017 is an open question. On the one hand, the demand – in the light of very low rates – is still there. On the other hand, both PBoC and CBRC are stepping up efforts to control the rapid growth of WMPs. Among all bank groups, JSCB is the most affected given their leading position in the issuance of WMP.

Overall, we believe banks will be more cautious in issuing WMPs, leaving more space for other actors to capture the growing market, especially funds and securities firms, who have seen the fastest increase in WMP issuance lately.